Cheap Imports Worry India's Steelmakers

NEW DELHI--Japan and South Korea have -- over the past five months -- emerged as major steel exporters to India, compounding worries for domestic manufacturers already threatened by cheaper products from China.

Tokyo and Seoul haven't traditionally been major exporters of steel to India, but with industrial activity slowing in other Asian countries, India's market has emerged as an attractive destination, given its strong demand and high domestic prices.

In the April-August period, Japan's steel exports to India surged 64% from a year earlier to 527,000 tons, while South Korea sent in 657,000 tons, up 28% on year.

India is the world's fourth-largest steelmaker after China, the U.S. and Japan, but it has always been a net importer, bringing in about 10% of total domestic consumption in the year through March 2012.

The biggest chunk of its steel imports come from China -- which produces 10 times more steel than India does. But analysts are not too concerned about imports from China, saying that once demand in that country recovers, it will cut exports.

However, the reason why imports from Japan and South Korea are raising a red flag is that they are mature economies which can sustain exports to India over a longer period of time.

Apart from the price difference -- global steel prices are around $650 a ton while the average in India is $750 a ton -- another major reason for the rise in exports from Japan and South Korea are their bilateral trade pacts with India, said Sayan Sen, a Kolkata-based official at India's federal steel ministry.

India signed a free trade agreement with South Korea in 2010 and another with Japan in August, 2011. These pacts have capped India's import taxes on flat steel products from the two countries around 3%, while imports from other destinations attract a 7.5% tax.

Indian companies are now demanding that steel be moved out of the FTAs.

Vikram Amin, Essar Steel Ltd.'s sales and marketing executive director, said: "I don't think the intent of India signing a free trade agreement with either Japan or South Korea could have been to hand over India's imported steel business to them."

He added: "Considering the high value addition in the steel industry and employment generation potential, it makes immense sense to export steel rather than import steel."

Mr. Amin said that these countries are benefiting from a lower import tax, lower cost of production and cheaper loans, while Indian producers are in a tight spot due to higher cost of production and taxes.

India's overall steel imports rose 39% in the April-August period, a cause of concern in a country where steelmakers are pumping in billions of dollars to expand capacity and build new plants.

Higher imports over the next few years could push down prices of Indian steel products, making it difficult for steel companies to make sufficient profits to justify the high investments.

The profit margins of Indian steelmakers are already under pressure because of high input costs.

Global iron ore prices, for instance, have fallen more than 50% since July. But India's biggest iron ore producer, NMDC Ltd., 526371.BY +0.86% has increased prices by 8%-13%.

This is because iron-ore mining is facing several hurdles in India as state governments take steps to punish illegal miners. Also, mining has been banned in one major producing province, Goa, and restricted in two others, Karnataka and Orissa.

While steel prices in India have fallen 2%-3% over the past few weeks, Giriraj Daga, a senior analyst with Nirmal Bang Equities, said international prices are still lower by around $100 a ton.

Earlier this month, a Citigroup C -1.08% analysts' report said that a price cut of 5,000 rupees ($90) a ton by major Indian steel producers could be disastrous for their profit margins.

Industry observers said that, for flat steel products, imports could hit 7 million tons in this financial year through March 2013, or about 20% of total domestic consumption.

Sajjan Jindal, chairman of JSW Steel Ltd., 500228.BY +1.91% said the steel industry is asking the government through various trade associations to take steel out of India's free trade agreements with Japan and South Korea.

"These imports are a big concern for India. We are still a developing steel market, unlike the developed markets in those countries," said Mr. Jindal.

Japanese steelmaker JFE Holdings Inc. 5411.TO -3.35% owns 15% of JSW Steel.

Source : online.wsj.com